On Feb 22, 2013, we downgraded our recommendation on
DaVita HealthCare Partners Inc.
) to Neutral from Outperform based on its high dependence on
commercial payors and government reimbursements. Moreover, rising
debt is hurting the company's financial leverage. DaVita carries
a Zacks Rank #3 (Hold).
Why the Downgrade?
A significant portion of DaVita's dialysis and related lab
services revenues are generated from patients who have commercial
payors as the primary payor. However, the rising unemployment may
result in shifting of people from commercial insurance schemes to
government schemes due to the wide disparity in payment
In fact, the mix of treatments reimbursed by non-government
payors, as a percentage of total treatments, has been falling
consistently over the years.
Moreover, DaVita's debt refinancing continues to increase its
financial leverage. Apart from using its free cash and credit
facility,it issued senior notes in Aug 2012,to finance the
acquisition of HealthCare Partners. This increased DaVita's
interest by $57.5 million annually, which will weigh on its
already high expenses.
The issuance will also increase the company's total debt,
thereby deteriorating its financial leverage.In fact, DaVita has
not repurchased any shares since Jul 2011 to conserve cash for
acquisitions amid the volatile debt market.
However, despite these negatives, DaVita reported
fourth-quarter 2012 operating earnings of $1.68 per share,
beating the Zacks Consensus Estimate of $1.57 as well as $1.56
per share reported in the prior-year quarter.
The operating income is expected to increase further in 2013,
which is reflected in the company's guidance of $1.75-$1.90
billion. Moreover, the service agreement with
Fresenius Medical Care
), announced in Jan 2013, is expected to boost the earnings of
DaVita's ancillary services and strategic initiatives segment,
which covers its pharmacy services.
Other Stocks to Consider
Other healthcare companies worth considering are
LHC Group, Inc.
), which carry a Zacks Rank #2 (Buy).
DAVITA INC (DVA): Free Stock Analysis Report
FRESENIUS MED (FMS): Free Stock Analysis
LHC GROUP LLC (LHCG): Free Stock Analysis
RADNET INC (RDNT): Free Stock Analysis Report
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